The mechanics of doing asset allocation

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Egilbert
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Joined: Sun Mar 10, 2013 11:29 am

The mechanics of doing asset allocation

Post by Egilbert »

For the last few years I've been using a Google spreadsheet to keep track of allocations across multiple accounts, which has been pretty convenient. I modeled the asset categories using some examples at this link: http://www.fundadvice.com/portfolio.html#ETF. US equities are broken down into 4 categories -- LCB, LCV, SCB, and SCV, with targets of equal allocations of each. Recently I started to question the way I was assigning various index funds to these categories. For example, I had been putting the Vanguard Small Cap Value VIPERs into the SCV column. But I looked at the composition of this fund using Morningstar's X-RAY, and by their definitions of small/large and growth/value, the Vanguard SCV fund is only 46% small cap value. 35% is small cap blend, 9% mid cap value, and the rest mid cap blend. Similarly, I had been putting an SP500 index fund wholly into the LCB column, but X-RAY shows that 34% of it is actually LCV.

My question is, do people generally use the detailed breakdowns of the various funds when keeping track of their allocations, or do they just lump the whole amount of each fund into whatever category seems to be the best fit? If I was to switch to using the detailed breakdowns I would have to do quite a bit of re-balancing.
jginseattle
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Re: The mechanics of doing asset allocation

Post by jginseattle »

It's worthwhile to research the composition of individual funds. You can now compare your small value fund to others, and this will help you decide on your asset allocation.

Another example... Vanguard's FTSE All-World ex-US Small-Cap Index Fund is mostly mid-caps.
livesoft
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Re: The mechanics of doing asset allocation

Post by livesoft »

I use whatever the M* Portfolio X-ray gives me. I don't use a spreadsheet because that's too much like being at work.
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rkhusky
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Re: The mechanics of doing asset allocation

Post by rkhusky »

If you are going to use 4 categories, it seems like they should be (LV, LG, SV, SG). If you are going to use 6 categories, they could be (LV, LB, LG, SV, SB, SG) or (LV, LG, MV, MG, SV, SG). If you want 9 categories, you would probably want (LV, LB, LG, MV, MB, MG, SV, SB, SG). The categories should have minimal overlap. It appears that Morningstar's use of Blend in their 3x3 grid does not contain the full range of Value and Growth, but only the middle portions. A fund that has the the category of Blend probably does have the full range and would overlap with a fund that is labeled Value or one that is label Growth.
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Aptenodytes
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Re: The mechanics of doing asset allocation

Post by Aptenodytes »

How to track this stuff depends on your goals. If you are happy with your allocation across funds and you envision yourself using these funds for the time being, there's no need to jump through the extra hoop of the Morningstar x-ray. It won't change your behavior so why bother. They way you currently do it is sufficient for tracking multi-account fund allocations.

But if you want to track FF factors, then you need to do things differently. The fund names don't tell you what the funds are invested in. Something like the Morningstar x-ray is needed. The fund prospectuses give this information too, though if you mix and match across fund families there may be inconsistencies in the prospectuses.

I adopt a hybrid approach. I figure out from the prospectuses and Morningstar how each of my funds invest. I then use that information to create an AA denominated in terms of funds. From then on all I have to do is track investments at the fund level.

I've done that twice in the last two and half years. Sometimes funds shift.
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nydad
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Re: The mechanics of doing asset allocation

Post by nydad »

This is what I do:

1) AA for domestic is based on LCV, LCG, SCV, SCG - using cascading asset allocation method. I have a tilt to value and small.
2) I use the morningstar xRay for each of the funds. For each "blend" percentage, I assign that half to value and half to growth. For midcaps, I assign around 80% to small and 20% to large.

Code: Select all

So, something like this:
24 24 25
6 6 7
3 3 3

Would be
LCV: 37.8
LCG: 38
SCV: 11.7
SCG: 12.5
3) Then, my spreadsheet sorts out my actual allocations to SCV according to those percentage splits.

Thus, this will show a difference in investing in S&P 500 vs total stock market, as they don't have equal allocations to small caps.

For my developed and emerging market AA targets, I just have a split between small and large (tilt to small), I don't explicitly tilt to value in the AA but the funds I use are generally value-tilted.

I welcome any critiques or suggestions for improvement. I haven't gone the way of FF factor loads yet.
Topic Author
Egilbert
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Re: The mechanics of doing asset allocation

Post by Egilbert »

Thanks to all for your comments.

Nydad, I like your method, and I think I will do something similar. Why did you pick 80/20 for small/large division of blend instead of say 50/50? Also, what does 'FF' mean?
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nydad
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Re: The mechanics of doing asset allocation

Post by nydad »

Why did you pick 80/20 for small/large division of blend instead of say 50/50? Also, what does 'FF' mean?
FF= Fama French

For blend, I split it as 50/50 as value and growth. The 80/20 split was for midcaps - since I don't have a 'midcap' allocation target, I just considered 80% of the midcaps as "small". It's not perfect, but it's just a rough approximation. I don't remember how I came up with that figure, and I may revisit it.

Also this year in reviewing my AA, I've noticed that there is indeed style drift in ETFs/Mutual funds - so if you are serious about doing this, then it's probably worth reviewing the MorningStar ratings for each fund on an annual basis.

One thing to note: It seems (to me) to be more "accurate" to do it my way than by for example assuming that TSM is 100% large blend and RZV is 100% small-cap value. However, when I rebalance, it makes things trickier - if you add "TSM" because you're overweighted on small caps and need more large caps, you get more large caps, but you also get more small caps in the mix. So you kind of have to experiment, because if I sell $10k of this ETF, and buy $10k of this ETF, that doesn't translate to -10k in one asset class and +10k in another asset class - you have to be more iterative when sorting out your rebalancing.

I use this spreadsheet http://home.comcast.net/~rowofducks/aa-worksheet.xls, with some modifications (for example, I pull in expense ratios and daily market prices automatically using smf_addin). The only manual maintenance I need to do is update # of shares owned, for example due to 401k contribution, etc; I have a separate table which calculates whether any of the AAs are 5% off portfolio level or 25% off their target, so at a glance I can see what needs to be rebalanced.
Cruncher
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Joined: Sun Jan 31, 2010 11:56 pm

Re: The mechanics of doing asset allocation

Post by Cruncher »

Here's how I break my AA down:

Asset class Target AA
D Lg Blend 15%
D Med Blend 15%
D Sm Blend 7%
D Sm Value 8%
REIT 10%
I Lg & Med Mkt 12%
Emerg Mkts 5%
I Sm Value 7%
I Sm Mkt 6%
Total bond 11%
TIPS 4%
Money Mkt 0%
100%

I do reference M*, but don't get too wrapped around the axle.

i used to have a LCV category, but through a bit more studying, I didn't really see much point, as the correlations were very close to LCB. Ditto MCV. So VIIIX is my LCB (based on the S&P 500). Looking at LCG & LCV, I found they more or less just swap out who leads the other long term, neither really triggering a rebalance event. Long term the LCB pretty much just stayed the course, made it simpler to manage. My MCB & SCB are based on the ... MSCI (?) so there is a bit of overlap within these two asset class metrics, but again, I don't get too wrapped around the axle.

Lastly, here's an interesting thing I found. My er of my portfolio of 29 funds / ETFs (couple ROTHs and 401ks) is 0.19%. Which equals the VTTHX, tgt dated 2035 fund.

IOW, I am probably doing a lot of work for nothing. :D

Cruncher
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